FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 2001
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
COMMISSION FILE NUMBER 001-08495
CONSTELLATION BRANDS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-0716709
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 WILLOWBROOK OFFICE PARK, FAIRPORT, NEW YORK 14450
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(Address of principal executive offices) (Zip Code)
(585) 218-2169
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding with respect to each of the classes of common
stock of Constellation Brands, Inc., as of December 31, 2001, is set forth
below:
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Class A Common Stock, Par Value $.01 Per Share 37,686,040
Class B Common Stock, Par Value $.01 Per Share 6,074,445
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
November 30, February 28,
2001 2001
------------ ------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 9,454 $ 145,672
Accounts receivable, net 473,835 314,262
Inventories, net 831,889 670,018
Prepaid expenses and other current assets 72,175 61,037
------------ ------------
Total current assets 1,387,353 1,190,989
PROPERTY, PLANT AND EQUIPMENT, net 561,667 548,614
OTHER ASSETS 1,178,471 772,566
------------ ------------
Total assets $ 3,127,491 $ 2,512,169
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 159,493 $ 4,184
Current maturities of long-term debt 80,039 54,176
Accounts payable 217,550 114,793
Accrued excise taxes 49,977 55,954
Other accrued expenses and liabilities 290,482 198,053
------------ ------------
Total current liabilities 797,541 427,160
------------ ------------
LONG-TERM DEBT, less current maturities 1,259,088 1,307,437
------------ ------------
DEFERRED INCOME TAXES 131,953 131,974
------------ ------------
OTHER LIABILITIES 33,628 29,330
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares;
Issued, none at November 30, 2001,
and February 28, 2001 - -
Class A Common Stock, $.01 par value-
Authorized, 120,000,000 shares;
Issued, 39,148,856 shares at
November 30, 2001, and 37,438,968
shares at February 28, 2001 391 374
Class B Convertible Common Stock,
$.01 par value-
Authorized, 20,000,000 shares;
Issued, 7,325,895 shares at
November 30, 2001, and 7,402,594 shares
at February 28, 2001 73 74
Additional paid-in capital 407,783 267,655
Retained earnings 565,218 455,798
Accumulated other comprehensive loss (34,082) (26,004)
------------ ------------
939,383 697,897
------------ ------------
Less-Treasury stock-
Class A Common Stock, 1,479,217 shares at
November 30, 2001, and 6,200,600 shares at
February 28, 2001, at cost (31,820) (79,271)
Class B Convertible Common Stock, 1,251,450
shares at November 30, 2001, and
February 28, 2001, at cost (2,207) (2,207)
------------ ------------
(34,027) (81,478)
------------ ------------
Less-Unearned compensation-restricted
stock awards (75) (151)
------------ ------------
Total stockholders' equity 905,281 616,268
------------ ------------
Total liabilities and stockholders' equity $ 3,127,491 $ 2,512,169
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
1
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Nine Months Ended November 30, For the Three Months Ended November 30,
-------------------------------------- ---------------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
GROSS SALES $ 2,774,023 $ 2,436,637 $ 987,776 $ 833,447
Less - Excise taxes (627,064) (583,990) (223,702) (203,870)
--------------- --------------- --------------- -------------
Net sales 2,146,959 1,852,647 764,074 629,577
COST OF PRODUCT SOLD (1,448,925) (1,260,082) (505,666) (421,524)
--------------- --------------- --------------- -------------
Gross profit 698,034 592,565 258,408 208,053
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (430,287) (379,159) (149,585) (122,815)
--------------- --------------- --------------- -------------
Operating income 267,747 213,406 108,823 85,238
EQUITY IN EARNINGS OF JOINT VENTURE 1,028 - 1,165 -
INTEREST EXPENSE, net (86,408) (81,797) (27,249) (26,983)
--------------- --------------- --------------- -------------
Income before income taxes 182,367 131,609 82,739 58,255
PROVISION FOR INCOME TAXES (72,947) (52,644) (33,096) (23,302)
--------------- --------------- --------------- -------------
NET INCOME $ 109,420 $ 78,965 $ 49,643 $ 34,953
=============== =============== =============== =============
SHARE DATA:
Earnings per common share:
Basic $ 2.58 $ 2.16 $ 1.14 $ 0.95
=============== =============== =============== =============
Diluted $ 2.51 $ 2.12 $ 1.11 $ 0.93
=============== =============== =============== =============
Weighted average common shares outstanding:
Basic 42,362 36,615 43,429 36,788
Diluted 43,570 37,283 44,739 37,469
<FN>
The accompanying notes to consolidated financial statements are an integral part of these statements.
</FN>
2
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Nine Months Ended November 30,
--------------------------------------
2001 2000
--------------- ---------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 109,420 $ 78,965
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property, plant and equipment 39,943 35,826
Amortization of intangible assets 24,048 19,285
(Gain) loss on sale of assets (2,175) 1,904
Equity in earnings of joint venture (1,028) -
Amortization of discount on long-term debt 413 370
Stock-based compensation expense 76 255
Change in operating assets and liabilities,
net of effects from purchases of businesses:
Accounts receivable, net (134,321) (104,496)
Inventories, net (57,664) (88,726)
Prepaid expenses and other current assets (10,499) (15,738)
Accounts payable 83,138 39,087
Accrued excise taxes (5,720) 15,975
Other accrued expenses and liabilities 80,560 39,067
Other assets and liabilities, net (2,517) (5,683)
--------------- ---------------
Total adjustments 14,254 (62,874)
--------------- ---------------
Net cash provided by operating activities 123,674 16,091
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (472,337) -
Investment in joint venture (77,282) -
Purchases of property, plant and equipment (47,158) (47,806)
Proceeds from sale of assets 35,499 1,379
--------------- ---------------
Net cash used in investing activities (561,278) (46,427)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable 156,226 96,922
Proceeds from equity offerings, net of fees 151,486 -
Exercise of employee stock options 35,249 5,530
Proceeds from issuance of long-term debt, net of discount 2,910 119,400
Proceeds from employee stock purchases 842 761
Principal payments of long-term debt (43,080) (221,557)
Payment of issuance costs of long-term debt (1,339) (1,668)
--------------- ---------------
Net cash provided by (used in) financing activities 302,294 (612)
--------------- ---------------
Effect of exchange rate changes on cash and cash investments (908) (1,489)
--------------- ---------------
NET DECREASE IN CASH AND CASH INVESTMENTS (136,218) (32,437)
CASH AND CASH INVESTMENTS, beginning of period 145,672 34,308
--------------- ---------------
CASH AND CASH INVESTMENTS, end of period $ 9,454 $ 1,871
=============== ===============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of assets acquired, including cash acquired $ 541,296 $ 15,115
Liabilities assumed (63,217) (10,628)
--------------- ---------------
Cash paid 478,079 4,487
Less - cash acquired (5,742) (4,487)
--------------- ---------------
Net cash paid for purchases of businesses $ 472,337 $ -
=============== ===============
Property, plant and equipment contributed to joint venture $ 30,020 $ -
=============== ===============
<FN>
The accompanying notes to consolidated financial statements are an integral part of these statements.
</FN>
3
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
1) MANAGEMENT'S REPRESENTATIONS:
The consolidated financial statements included herein have been prepared by
Constellation Brands, Inc. and its subsidiaries (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
applicable to quarterly reporting on Form 10-Q and reflect, in the opinion of
the Company, all adjustments necessary to present fairly the financial
information for the Company. All such adjustments are of a normal recurring
nature. Certain information and footnote disclosures normally included in
financial statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted as permitted by such rules and
regulations. These consolidated financial statements and related notes should be
read in conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 2001. Results of operations for interim periods are not necessarily
indicative of annual results.
Certain November 30, 2000, and February 28, 2001, balances have been
reclassified to conform to current year presentation.
2) ACCOUNTING CHANGES:
Effective March 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities", as amended, which establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
No. 133 requires that the Company recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
The adoption of SFAS No. 133 did not have a material impact on the Company's
consolidated financial position, results of operations, or cash flows. The
Company is exposed to market risk associated with changes in foreign currency
exchange rates. The Company has limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company periodically
enters into derivative transactions solely to manage the volatility and to
reduce the financial impact relating to this risk.
The Company uses foreign currency exchange agreements to reduce the risk of
foreign currency exchange rate fluctuations resulting primarily from contracts
to purchase inventory items that are denominated in various foreign currencies.
Certain of these derivative contracts are designated to hedge the exposure to
variable cash flows of a forecasted transaction and are classified as cash flow
hedges. As such, the effective portion of the change in the fair value of the
derivatives is recorded each period in the balance sheet in accumulated other
comprehensive income/loss ("AOCI"), and is reclassified into the statement of
income, primarily as a component of cost of goods sold, in the same period
during which the hedged transaction affects earnings. The currency forward
exchange contracts used generally have maturity terms of twelve months or less.
The Company expects the entire balance in AOCI related to cash flow hedges to be
reclassified to the statement of income within the next twelve months. The
Company formally documents all relationships between hedging instruments and
hedged items in accordance with SFAS No. 133 requirements.
The Company uses the remaining foreign currency exchange agreements to
reduce the risk of foreign currency exchange rate fluctuations resulting
primarily from recorded accounts payable denominated in various foreign
currencies. As these derivative contracts have not been designated as hedging
instruments, all resulting gains or losses are recognized in earnings in the
period of change.
4
The Company has exposure to foreign currency risk, primarily in the United
Kingdom, as a result of having international subsidiaries. The Company uses
local currency borrowings to hedge its earnings and cash flow exposure to
adverse changes in foreign currency exchange rates. Such borrowings are
designated as a hedge of the foreign currency exposure of the net investment in
the foreign operation. Accordingly, the effective portion of the foreign
currency gain or loss on the hedging debt instrument is reported in AOCI as part
of the foreign currency translation adjustments. For the nine months and three
months ended November 30, 2001, net gains of $4.1 million and $5.8 million,
respectively, are included in foreign currency translation adjustments within
AOCI.
3) ACQUISITIONS:
On October 27, 2000, the Company purchased all of the issued Ordinary
Shares and Preference Shares of Forth Wines Limited ("Forth Wines"). The
purchase price was $4.5 million and was accounted for using the purchase method;
accordingly, the acquired net assets were recorded at fair market value at the
date of acquisition. The excess of the purchase price over the fair market value
of the net assets acquired (goodwill), $2.2 million, is being amortized on a
straight-line basis over 40 years. The results of operations of Forth Wines are
reported in the Matthew Clark segment and have been included in the Consolidated
Statements of Income since the date of acquisition.
On March 5, 2001, in an asset acquisition, the Company acquired several
well-known premium wine brands, including Vendange, Nathanson Creek, Heritage,
and Talus, working capital (primarily inventories), two wineries in California,
and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River
Vintners Group (the "Turner Road Vintners Assets"). The preliminary purchase
price of the Turner Road Vintners Assets, including assumption of indebtedness
of $9.4 million, was $289.8 million. The purchase price is subject to final
closing adjustments which the Company does not expect to be material. The
acquisition was financed by the proceeds from the sale of the February 2001
Senior Notes and revolving loan borrowings under the senior credit facility. The
Turner Road Vintners Assets acquisition was accounted for using the purchase
method; accordingly, the acquired net assets were recorded at fair market value
at the date of acquisition, subject to final appraisal. The excess of the
purchase price over the estimated fair market value of the net assets acquired
(goodwill), $116.5 million, is being amortized on a straight-line basis over 40
years. The results of operations of the Turner Road Vintners Assets are reported
in the Canandaigua Wine segment and have been included in the Consolidated
Statements of Income since the date of acquisition.
On March 26, 2001, in an asset acquisition, the Company acquired certain
wine brands, wineries, working capital (primarily inventories), and other
related assets from Corus Brands, Inc. (the "Corus Assets"). In this
acquisition, the Company acquired several well-known premium wine brands
primarily sold in the northwestern United States, including Covey Run, Columbia,
Ste. Chapelle and Alice White. The preliminary purchase price of the Corus
Assets, including assumption of indebtedness of $3.0 million, was $52.3 million
plus an earn-out over six years based on the performance of the brands. The
purchase price is subject to final closing adjustments which the Company does
not expect to be material. In connection with the transaction, the Company also
entered into long-term grape supply agreements with affiliates of Corus Brands,
Inc. covering more than 1,000 acres of Washington and Idaho vineyards. The
acquisition was financed with revolving loan borrowings under the senior credit
facility. The Corus Assets acquisition was accounted for using the purchase
method; accordingly, the acquired net assets were recorded at fair market value
at the date of acquisition, subject to final appraisal. The excess of the
purchase price over the estimated fair market value of the net assets acquired
(goodwill), $10.0 million, is being amortized on a straight-line basis over 40
years. The results of operations of the Corus Assets are reported in the
Canandaigua Wine segment and have been included in the Consolidated Statements
of Income since the date of acquisition.
5
On July 2, 2001, the Company purchased all of the outstanding capital stock
of Ravenswood Winery, Inc. ("Ravenswood"). Ravenswood produces, markets and
sells super-premium and ultra-premuim California wine, primarily under the
Ravenswood brand name. The preliminary purchase price of Ravenswood, including
assumption of indebtedness of $2.9 million, was $151.3 million. The purchase
price is subject to final closing adjustments which the Company does not expect
to be material. The purchase price was financed with revolving loan borrowings
under the senior credit facility. The Ravenswood acquisition was accounted for
using the purchase method; accordingly, the acquired net assets were recorded at
fair market value at the date of acquisition, subject to final appraisal. The
excess of the purchase price over the estimated fair market value of the net
assets acquired (goodwill), $58.4 million, will not be amortized and will be
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142 (as defined in Note 14). The Ravenswood acquisition was in line
with the Company's strategy of further penetrating the higher gross profit
margin super-premium and ultra-premium wine categories. The results of
operations of Ravenswood are reported in the Franciscan segment and have been
included in the Consolidated Statements of Income since the date of acquisition.
The unaudited pro forma results of operations for the nine months ended November
30, 2001 (shown in the table below), reflect total nonrecurring charges of $12.6
million ($0.17 per share on a diluted basis) related to transaction costs,
primarily for the acceleration of vesting of stock options, which were incurred
by Ravenswood prior to the acquisition.
The following table sets forth the unaudited pro forma results of
operations of the Company for the nine months and three months ended November
30, 2001 and 2000. The unaudited pro forma results of operations for the nine
months ended November 30, 2001 and 2000, and the three months ended November 30,
2000, give effect to the acquisitions of the Turner Road Vintners Assets, Corus
Assets, and Ravenswood as if they occurred on March 1, 2000. The unaudited pro
forma results of operations for the nine months and three months ended November
30, 2000, do not give pro forma effect to the acquisition of Forth Wines as if
it occurred on March 1, 2000, as it is not significant. The unaudited pro forma
results of operations are presented after giving effect to certain adjustments
for depreciation, amortization of goodwill, interest expense on the acquisition
financing and related income tax effects. The unaudited pro forma results of
operations are based upon currently available information and upon certain
assumptions that the Company believes are reasonable under the circumstances.
The unaudited pro forma results of operations do not purport to present what the
Company's results of operations would actually have been if the aforementioned
transactions had in fact occurred on such date or at the beginning of the period
indicated, nor do they project the Company's financial position or results of
operations at any future date or for any future period.
For the Nine Months For the Three Months
Ended November 30, Ended November 30,
----------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(in thousands, except per share data)
Net sales $ 2,162,318 $ 2,056,562 $ 764,074 $ 702,788
Income before income taxes $ 167,776 $ 115,161 $ 82,739 $ 54,336
Net income $ 100,254 $ 69,096 $ 49,643 $ 32,601
Earnings per common share:
Basic $ 2.37 $ 1.89 $ 1.14 $ 0.89
============ ============ ============ ============
Diluted $ 2.30 $ 1.85 $ 1.11 $ 0.87
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 42,362 36,615 43,429 36,788
Diluted 43,570 37,283 44,739 37,469
6
4) INVENTORIES:
Inventories are stated at the lower of cost (computed in accordance with
the first-in, first-out method) or market. Elements of cost include materials,
labor and overhead and consist of the following:
November 30, February 28,
2001 2001
------------ ------------
(in thousands)
Raw materials and supplies $ 42,845 $ 28,007
In-process inventories 549,061 450,650
Finished case goods 239,983 191,361
------------ ------------
$ 831,889 $ 670,018
============ ============
5) OTHER ASSETS:
The major components of other assets are as follows:
November 30, February 28,
2001 2001
------------ ------------
(in thousands)
Goodwill $ 630,829 $ 447,813
Trademarks 381,963 247,139
Investment in joint venture 108,897 -
Distribution rights and agency
license agreements 87,052 87,052
Other 78,186 75,232
------------ ------------
1,286,927 857,236
Less - Accumulated amortization (108,456) (84,670)
------------ ------------
$ 1,178,471 $ 772,566
============ ============
6) INVESTMENT IN JOINT VENTURE:
On July 31, 2001, the Company and BRL Hardy Limited completed the formation
of Pacific Wine Partners LLC ("PWP"), a joint venture owned equally by the
Company and BRL Hardy Limited, the second largest wine company in Australia. PWP
produces, markets and sells a global portfolio of premium wine in the United
States, including a range of Australian imports, the fastest growing wine
segment in the United States. PWP has exclusive distribution rights in the
United States and the Caribbean to seven brands - Banrock Station, Hardys,
Leasingham, Barossa Valley Estate and Chateau Reynella from Australia; Nobilo
from New Zealand; and La Baume from France. The joint venture also owns
Farallon, a premium California coastal wine. In addition, PWP owns the Riverland
Vineyards winery and controls 1,400 acres of vineyards, all located in Monterey
County, California.
The Company contributed to PWP assets with a carrying amount of $30.0
million plus $5.5 million of cash. The Company sold assets with a carrying
amount of $31.2 million to BRL Hardy (USA) Inc. ("Hardy") and received $34.9
million in cash. Hardy contributed these assets plus $5.5 million of cash to
PWP. The Company and PWP are parties to the following agreements: administrative
and selling services agreement; crushing, wine production, bottling, storage,
and related services agreement; inventory supply agreement; sublease and
assumption agreements pertaining to certain vineyards, which agreements include
a market value adjustment provision; and a market value adjustment agreement
relating to a certain vineyard lease held by PWP. As of November 30, 2001,
amounts related to the above agreements were not material.
On October 16, 2001, the Company announced that PWP completed the purchase
of certain assets of Blackstone Winery, including the Blackstone brand and the
Codera wine business in Sonoma County
7
("the Blackstone Assets"). The preliminary purchase price of the Blackstone
Assets was $140.0 million and was financed equally by the Company and Hardy. The
purchase price is subject to final closing adjustments which the Company does
not expect to be material. The Company used revolving loan borrowings under its
senior credit facility to fund the Company's portion of the transaction.
As of November 30, 2001, the Company's investment balance, which is
accounted for under the equity method, was $108.9 million and is included on the
Consolidated Balance Sheets in other assets. The carrying amount of the
investment is less than the Company's equity in the underlying net assets of PWP
by $4.2 million. This amount is included in earnings as the assets are used by
PWP.
7) OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of other accrued expenses and liabilities are as
follows:
November 30, February 28,
2001 2001
------------ ------------
(in thousands)
Accrued advertising and promotions $ 58,878 $ 44,501
Accrued income taxes payable 45,172 21,122
Accrued grape purchases 27,891 -
Accrued salaries and commissions 27,810 24,589
Accrued interest 26,560 28,542
Other 104,171 79,299
------------ ------------
$ 290,482 $ 198,053
============ ============
8) BORROWINGS:
In July 2001, the Company exchanged $200.0 million aggregate principal
amount of 8% Series B Senior Notes due February 2008 (the "February 2001 Series
B Senior Notes") for all of the February 2001 Senior Notes. The terms of the
February 2001 Series B Senior Notes are identical in all material respects to
the February 2001 Senior Notes.
9) STOCKHOLDERS' EQUITY:
Equity offerings -
----------------
During March 2001, the Company completed a public offering of 4,370,000
shares of its Class A Common Stock resulting in net proceeds to the Company,
after deducting underwriting discounts and expenses, of $139.4 million. The net
proceeds were used to repay revolving loan borrowings under the senior credit
facility of which a portion was incurred to partially finance the acquisition of
the Turner Road Vintners Assets.
During October 2001, the Company sold 322,500 shares of its Class A Common
Stock in connection with a public offering of Class A Common Stock by
stockholders of the Company. The net proceeds to the Company, after deducting
underwriting discounts, of $12.1 million were used to repay borrowings under the
senior credit facility.
Employee stock purchase plan -
----------------------------
The Company has a stock purchase plan under which 500,000 shares of the
Company's Class A Common Stock may be issued to eligible employees and directors
of the Company's United Kingdom subsidiaries. In connection with the Company's
May 2001 two-for-one stock split, the Company has submitted to the Inland
Revenue, for its approval, a revised plan to increase the number of shares
available under the plan to 1,000,000. Under the terms of the plan, participants
may purchase shares of the Company's Class A Common Stock through payroll
deductions. The purchase price may be no less
8
than 80% of the closing price of the stock on the day the purchase price is
fixed by the committee administering the plan. As of November 30, 2001, no
shares have been issued.
10) EARNINGS PER COMMON SHARE:
Basic earnings per common share exclude the effect of common stock
equivalents and are computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period
for Class A Common Stock and Class B Convertible Common Stock. Diluted earnings
per common share reflect the potential dilution that could result if securities
or other contracts to issue common stock were exercised or converted into common
stock. Diluted earnings per common share assume the exercise of stock options
using the treasury stock method and assume the conversion of convertible
securities, if any, using the "if converted" method.
The computation of basic and diluted earnings per common share is as
follows:
For the Nine Months For the Three Months
Ended November 30, Ended November 30,
------------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(in thousands, except per share data)
Income applicable to common shares $ 109,420 $ 78,965 $ 49,643 $ 34,953
========== ========== ========== ==========
Weighted average common shares
outstanding - basic 42,362 36,615 43,429 36,788
Stock options 1,208 668 1,310 681
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - diluted 43,570 37,283 44,739 37,469
========== ========== ========== ==========
EARNINGS PER COMMON SHARE - BASIC $ 2.58 $ 2.16 $ 1.14 $ 0.95
========== ========== ========== ==========
EARNINGS PER COMMON SHARE - DILUTED $ 2.51 $ 2.12 $ 1.11 $ 0.93
========== ========== ========== ==========
Stock options to purchase 1.1 million and 1.7 million shares of Class A
Common Stock at a weighted average price per share of $41.23 and $52.31 were
outstanding during the nine months ended November 30, 2001 and 2000,
respectively, but were not included in the computation of the diluted earnings
per common share because the stock options' exercise price was greater than the
average market price of the Class A Common Stock for the respective periods.
Stock options to purchase 1.1 million and 1.7 million shares of Class A Common
Stock at a weighted average price per share of $41.23 and $52.32 were
outstanding during the three months ended November 30, 2001 and 2000,
respectively, but were not included in the computation of the diluted earnings
per common share because the stock options' exercise price was greater than the
average market price of the Class A Common Stock for the respective periods.
11) COMPREHENSIVE INCOME:
Comprehensive income consists of net income, foreign currency translation
adjustments and net unrealized gains on derivative instruments for the nine
months and three months ended November 30, 2001 and 2000.
9
The reconciliation of net income to comprehensive income is as follows:
For the Nine Months For the Three Months
Ended November 30, Ended November 30,
------------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(in thousands)
Net income $ 109,420 $ 78,965 $ 49,643 $ 34,953
Other comprehensive income, net of tax:
Foreign currency translation adjustments (8,114) (23,483) (5,232) (4,370)
Cash flow hedges:
Net derivative gains, net of tax effect of $103 and
$7, respectively 209 - (10) -
Reclassification adjustments, net of tax effect of
$80 and $5, respectively (173) - 13 -
---------- ---------- ---------- ----------
Net cash flow hedges 36 - 3 -
---------- ---------- ---------- ----------
Total comprehensive income $ 101,342 $ 55,482 $ 44,414 $ 30,583
========== ========== ========== ==========
Accumulated other comprehensive loss includes the following components:
For the Nine Months Ended November 30, 2001
-------------------------------------------------------
Foreign Net Accumulated
Currency Unrealized Other
Translation Gains on Comprehensive
Adjustments Derivatives Loss
--------------- --------------- ---------------
Beginning balance, February 28, 2001 $ (26,004) $ - $ (26,004)
Current-period change (8,114) 36 (8,078)
--------------- --------------- ---------------
Ending balance, November 30, 2001 $ (34,118) $ 36 $ (34,082)
=============== =============== ===============
12) CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
The following information sets forth the condensed consolidating balance
sheets as of November 30, 2001 and 2000, and the condensed consolidating
statements of income and cash flows for the nine months and three months ended
November 30, 2001 and 2000, for the parent company, the combined subsidiaries of
the Company which guarantee the Company's senior notes and senior subordinated
notes ("Subsidiary Guarantors"), the combined subsidiaries of the Company which
are not Subsidiary Guarantors, primarily Matthew Clark ("Subsidiary
Nonguarantors"), and the consolidated Company. The Subsidiary Guarantors are
wholly owned and the guarantees are full, unconditional, joint and several
obligations of each of the Subsidiary Guarantors. The accounting policies of the
parent company, the Subsidiary Guarantors and the Subsidiary Nonguarantors are
the same as those described for the Company in the Summary of Significant
Accounting Policies in Note 1 to the Company's consolidated financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 2001. There are no restrictions on the ability of the Subsidiary
Guarantors to transfer funds to the Company in the form of cash dividends, loans
or advances.
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
(in thousands)
Condensed Consolidating Balance Sheet
- -------------------------------------
at November 30, 2001
- --------------------
Current assets:
Cash and cash investments $ 1,204 $ 7,780 $ 470 $ - $ 9,454
Accounts receivable, net 94,922 177,937 200,976 - 473,835
Inventories, net 22,770 662,086 147,149 (116) 831,889
Prepaid expenses and other
current assets 7,818 46,090 18,267 - 72,175
Intercompany (payable) receivable (16,346) (18,255) 34,601 - -
------------- ------------ ------------- ------------ ------------
Total current assets 110,368 875,638 401,463 (116) 1,387,353
10
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
(in thousands)
Property, plant and equipment, net 32,086 343,330 186,251 - 561,667
Investment in subsidiaries 2,395,342 551,932 - (2,947,274) -
Other assets 84,063 852,823 241,585 - 1,178,471
------------- ------------ ------------- ------------ ------------
Total assets $ 2,621,859 $ 2,623,723 $ 829,299 $ (2,947,390) $ 3,127,491
============= ============ ============= ============ ============
Current liabilities:
Notes payable $ 155,000 $ - $ 4,493 $ - $ 159,493
Current maturities of long-term debt 71,520 1,971 6,548 - 80,039
Accounts payable and other liabilities 166,802 114,047 227,183 - 508,032
Accrued excise taxes 7,338 20,867 21,772 - 49,977
------------- ------------ ------------- ------------ ------------
Total current liabilities 400,660 136,885 259,996 - 797,541
Long-term debt, less current maturities 1,246,264 12,720 104 - 1,259,088
Deferred income taxes 33,232 70,260 28,461 - 131,953
Other liabilities 503 10,495 22,630 - 33,628
Stockholders' equity:
Class A and class B common stock 464 6,434 64,867 (71,301) 464
Additional paid-in capital 407,783 1,220,092 436,466 (1,656,558) 407,783
Retained earnings 565,333 1,168,817 50,599 (1,219,531) 565,218
Accumulated other comprehensive
income (loss) 1,722 (1,980) (33,824) - (34,082)
Treasury stock and other (34,102) - - - (34,102)
------------- ------------ ------------- ------------ ------------
Total stockholders' equity 941,200 2,393,363 518,108 (2,947,390) 905,281
------------- ------------ ------------- ------------ ------------
Total liabilities and
stockholders' equity $ 2,621,859 $ 2,623,723 $ 829,299 $ (2,947,390) $ 3,127,491
============= ============ ============= ============ ============
Condensed Consolidating Balance Sheet
- -------------------------------------
at February 28, 2001
- --------------------
Current assets:
Cash and cash investments $ 142,104 $ 3,239 $ 329 $ - $ 145,672
Accounts receivable, net 80,299 116,784 117,179 - 314,262
Inventories, net 31,845 515,274 122,965 (66) 670,018
Prepaid expenses and other
current assets 6,551 33,565 20,921 - 61,037
Intercompany (payable) receivable (61,783) 54,169 7,614 - -
------------- ------------ ------------- ------------ ------------
Total current assets 199,016 723,031 269,008 (66) 1,190,989
Property, plant and equipment, net 30,554 320,143 197,917 - 548,614
Investment in subsidiaries 1,835,088 525,442 - (2,360,530) -
Other assets 87,764 434,782 250,020 - 772,566
------------- ------------ ------------- ------------ ------------
Total assets $ 2,152,422 $ 2,003,398 $ 716,945 $ (2,360,596) $ 2,512,169
============= ============ ============= ============ ============
Current liabilities:
Notes payable $ - $ - $ 4,184 $ - $ 4,184
Current maturities of long-term debt 49,218 70 4,888 - 54,176
Accounts payable and other liabilities 111,388 58,448 143,010 - 312,846
Accrued excise taxes 9,411 35,474 11,069 - 55,954
------------- ------------ ------------- ------------ ------------
Total current liabilities 170,017 93,992 163,151 - 427,160
Long-term debt, less current maturities 1,305,302 758 1,377 - 1,307,437
Deferred income taxes 33,232 71,619 27,123 - 131,974
Other liabilities 437 2,953 25,940 - 29,330
Stockholders' equity:
Class A and class B common stock 448 6,434 64,867 (71,301) 448
Additional paid-in capital 267,655 742,343 436,466 (1,178,809) 267,655
Retained earnings 455,864 1,086,311 24,109 (1,110,486) 455,798
Accumulated other comprehensive
income (loss) 1,096 (1,012) (26,088) - (26,004)
Treasury stock and other (81,629) - - - (81,629)
------------- ------------ ------------- ------------ ------------
11
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
(in thousands)
Total stockholders' equity 643,434 1,834,076 499,354 (2,360,596) 616,268
------------- ------------ ------------- ------------ ------------
Total liabilities and
stockholders' equity $ 2,152,422 $ 2,003,398 $ 716,945 $ (2,360,596) $ 2,512,169
============= ============ ============= ============ ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Nine Months Ended November 30, 2001
- -------------------------------------------
Gross sales $ 685,760 $ 1,551,188 $ 842,024 $ (304,949) $ 2,774,023
Less - excise taxes (110,805) (316,167) (200,092) - (627,064)
------------- ------------ ------------- ------------ ------------
Net sales 574,955 1,235,021 641,932 (304,949) 2,146,959
Cost of product sold (388,457) (903,344) (462,024) 304,900 (1,448,925)
------------- ------------ ------------- ------------ ------------
Gross profit 186,498 331,677 179,908 (49) 698,034
Selling, general and administrative
expenses (125,201) (168,748) (136,338) - (430,287)
------------- ------------ ------------- ------------ ------------
Operating income 61,297 162,929 43,570 (49) 267,747
Equity in earnings of
subsidiary/joint venture 82,506 27,518 - (108,996) 1,028
Interest expense, net (7,011) (76,397) (3,000) - (86,408)
------------- ------------ ------------- ------------ ------------
Income (loss) before income taxes 136,792 114,050 40,570 (109,045) 182,367
Provision for income taxes (27,323) (31,544) (14,080) - (72,947)
------------- ------------ ------------- ------------ ------------
Net income $ 109,469 $ 82,506 $ 26,490 $ (109,045) $ 109,420
============= ============ ============= ============ ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Nine Months Ended November 30, 2000
- -------------------------------------------
Gross sales $ 534,914 $ 1,319,066 $ 743,314 $ (160,657) $ 2,436,637
Less - excise taxes (97,989) (309,882) (176,119) - (583,990)
------------- ------------ ------------- ------------ ------------
Net sales 436,925 1,009,184 567,195 (160,657) 1,852,647
Cost of product sold (334,134) (688,636) (397,797) 160,485 (1,260,082)
------------- ------------ ------------- ------------ ------------
Gross profit 102,791 320,548 169,398 (172) 592,565
Selling, general and administrative
expenses (110,958) (125,691) (142,510) - (379,159)
------------- ------------ ------------- ------------ ------------
Operating (loss) income (8,167) 194,857 26,888 (172) 213,406
Equity in earnings of subsidiary 96,402 7,255 - (103,657) -
Interest expense, net (20,608) (57,674) (3,515) - (81,797)
------------- ------------ ------------- ------------ ------------
Income before income taxes 67,627 144,438 23,373 (103,829) 131,609
Benefit from (provision for)
income taxes 11,510 (48,036) (16,118) - (52,644)
------------- ------------ ------------- ------------ ------------
Net income $ 79,137 $ 96,402 $ 7,255 $ (103,829) $ 78,965
============= ============ ============= ============ ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Three Months Ended November 30, 2001
- --------------------------------------------
Gross sales $ 260,364 $ 527,559 $ 311,001 $ (111,148) $ 987,776
Less - excise taxes (42,858) (105,228) (75,616) - (223,702)
------------- ------------ ------------- ------------ ------------
Net sales 217,506 422,331 235,385 (111,148) 764,074
Cost of product sold (186,544) (265,344) (164,896) 111,118 (505,666)
------------- ------------ ------------- ------------ ------------
Gross profit 30,962 156,987 70,489 (30) 258,408
Selling, general and administrative
expenses (42,773) (79,333) (27,479) - (149,585)
------------- ------------ ------------- ------------ ------------
Operating (loss) income (11,811) 77,654 43,010 (30) 108,823
Equity in earnings of
subsidiary/joint venture 61,822 36,370 - (97,027) 1,165
Interest expense, net 911 (27,224) (936) - (27,249)
------------- ------------ ------------- ------------ ------------
Income before income taxes 50,922 86,800 42,074 (97,057) 82,739
Provision for income taxes (1,249) (24,978) (6,869) - (33,096)
------------- ------------ ------------- ------------ ------------
Net income $ 49,673 $ 61,822 $ 35,205 $ (97,057) $ 49,643
============= ============ ============= ============= ============
12
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Three Months Ended November 30, 2000
- --------------------------------------------
Gross sales $ 191,108 $ 386,750 $ 260,720 $ (5,131) $ 833,447
Less - excise taxes (35,151) (103,951) (64,768) - (203,870)
------------- ------------ ------------- ------------ ------------
Net sales 155,957 282,799 195,952 (5,131) 629,577
Cost of product sold (124,502) (166,404) (135,673) 5,055 (421,524)
------------- ------------ ------------- ------------ ------------
Gross profit 31,455 116,395 60,279 (76) 208,053
Selling, general and administrative
expenses (35,300) (48,623) (38,892) - (122,815)
------------- ------------ ------------- ------------ ------------
Operating (loss) income (3,845) 67,772 21,387 (76) 85,238
Equity in earnings of subsidiary 41,803 13,558 - (55,361) -
Interest expense, net (7,445) (18,333) (1,205) - (26,983)
------------- ------------ ------------- ------------ ------------
Income before income taxes 30,513 62,997 20,182 (55,437) 58,255
Benefit from (provision for)
income taxes 4,516 (21,194) (6,624) - (23,302)
------------- ------------ ------------- ------------ ------------
Net income $ 35,029 $ 41,803 $ 13,558 $ (55,437) $ 34,953
============= ============ ============= ============ ============
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------
for the Nine Months Ended November 30, 2001
- -------------------------------------------
Net cash provided by
operating activities $ 38,287 $ 76,280 $ 8,785 $ 322 $ 123,674
Cash flows from investing activities:
Purchases of businesses, net of
cash acquired (478,115) 5,778 - - (472,337)
Investment in joint venture - (77,282) - - (77,282)
Purchases of property, plant and
equipment (6,038) (31,110) (10,010) - (47,158)
Proceeds from sale of assets - 35,150 349 - 35,499
------------- ------------ ------------- ------------ ------------
Net cash used in investing activities (484,153) (67,464) (9,661) - (561,278)
------------- ------------ ------------- ------------ ------------
Cash flows from financing activities:
Net proceeds from notes payable 155,000 - 1,226 - 156,226
Proceeds from equity offerings, net
of fees 151,486 - - - 151,486
Exercise of employee stock options 35,249 - - - 35,249
Proceeds from issuance of
long-term debt, net of discount - - 2,910 - 2,910
Proceeds from employee stock
purchases 842 - - - 842
Principal payments of long-term debt (33,038) (8,348) (1,694) - (43,080)
Payment of issuance costs of
long-term debt (1,339) - - - (1,339)
------------- ------------ ------------- ------------ ------------
Net cash provided by (used in)
financing activities 308,200 (8,348) 2,442 - 302,294
------------- ------------ ------------- ------------ ------------
Effect of exchange rate changes on
cash and cash investments (3,234) 4,073 (1,425) (322) (908)
------------- ------------ ------------- ------------ ------------
Net (decrease) increase in cash
and cash investments (140,900) 4,541 141 - (136,218)
Cash and cash investments, beginning
of period 142,104 3,239 329 - 145,672
------------- ------------ ------------- ------------ ------------
Cash and cash investments, end of period $ 1,204 $ 7,780 $ 470 $ - $ 9,454
============= ============ ============= ============ ============
13
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------
for the Nine Months Ended November 30, 2000
- ---------------------------------------------
Net cash provided by (used in)
operating activities $ 35,573 $ 1,684 $ (21,166) $ - $ 16,091
Cash flows from investing activities:
Purchases of property, plant and
equipment (3,750) (31,381) (12,675) - (47,806)
Proceeds from sale of assets 120 484 775 - 1,379
------------- ------------ ------------- ------------ ------------
Net cash used in investing activities (3,630) (30,897) (11,900) - (46,427)
------------- ------------ ------------- ------------ ------------
Cash flows from financing activities:
Net proceeds from notes payable 94,200 - 2,722 - 96,922
Exercise of employee stock options 5,530 - - - 5,530
Proceeds from issuance of long-term
debt, net of discount 119,400 - - - 119,400
Proceeds from employee stock
purchases 761 - - - 761
Principal payments of long-term debt (220,564) (48) (945) - (221,557)
Payment of issuance costs of
long-term debt (1,668) - - - (1,668)
------------- ------------ ------------- ------------ ------------
Net cash (used in) provided by
financing activities (2,341) (48) 1,777 - (612)
------------- ------------ ------------- ------------ ------------
Effect of exchange rate changes on
cash and cash investments (29,292) 30,466 (2,663) - (1,489)
------------- ------------ ------------- ------------ ------------
Net increase (decrease) in cash
and cash investments 310 1,205 (33,952) - (32,437)
Cash and cash investments, beginning
of period - 231 34,077 - 34,308
------------- ------------ ------------- ------------ ------------
Cash and cash investments, end of period $ 310 $ 1,436 $ 125 $ - $ 1,871
============= ============ ============= ============ ============
13) BUSINESS SEGMENT INFORMATION:
The Company reports its operating results in five segments: Canandaigua
Wine (branded popular and premium wine and brandy, and other, primarily grape
juice concentrate and bulk wine); Barton (primarily beer and distilled spirits);
Matthew Clark (branded wine, cider and bottled water, and wholesale wine, cider,
distilled spirits, beer and soft drinks); Franciscan (primarily branded
super-premium and ultra-premium wine) and Corporate Operations and Other
(primarily corporate related items). Segment selection was based upon internal
organizational structure, the way in which these operations are managed and
their performance evaluated by management and the Company's Board of Directors,
the availability of separate financial results, and materiality considerations.
The accounting policies of the segments are the same as those described for the
Company in the Summary of Significant Accounting Policies in Note 1 to the
Company's consolidated financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2001. The Company
evaluates performance based on operating income of the respective business
units.
14
Segment information is as follows:
For the Nine Months For the Three Months
Ended November 30, Ended November 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(in thousands)
Canandaigua Wine:
- -----------------
Net sales:
Branded:
External customers $ 583,700 $ 450,927 $ 220,670 $ 160,221
Intersegment 7,532 5,023 2,888 1,891
------------ ------------ ------------ ------------
Total Branded 591,232 455,950 223,558 162,112
------------ ------------ ------------ ------------
Other:
External customers 46,240 49,317 18,857 19,215
Intersegment 10,413 11,450 2,557 3,095
------------ ------------ ------------ ------------
Total Other 56,653 60,767 21,414 22,310
------------ ------------ ------------ ------------
Net sales $ 647,885 $ 516,717 $ 244,972 $ 184,422
Operating income $ 75,706 $ 34,481 $ 36,377 $ 16,281
Long-lived assets $ 187,211 $ 190,742 $ 187,211 $ 190,742
Total assets $ 1,099,704 $ 685,674 $ 1,099,704 $ 685,674
Capital expenditures $ 11,841 $ 11,997 $ 5,764 $ 4,240
Depreciation and amortization $ 23,546 $ 17,822 $ 7,387 $ 5,941
Barton:
- -------
Net sales:
Beer $ 593,435 $ 538,585 $ 181,264 $ 163,292
Spirits 223,657 224,203 79,826 79,096
------------ ------------ ------------ ------------
Net sales $ 817,092 $ 762,788 $ 261,090 $ 242,388
Operating income $ 143,234 $ 135,818 $ 47,822 $ 46,370
Long-lived assets $ 79,633 $ 76,885 $ 79,633 $ 76,885
Total assets $ 713,416 $ 717,071 $ 713,416 $ 717,071
Capital expenditures $ 9,253 $ 4,646 $ 2,517 $ 1,660
Depreciation and amortization $ 13,487 $ 11,982 $ 4,337 $ 4,078
Matthew Clark:
- --------------
Net sales:
Branded:
External customers $ 232,868 $ 224,734 $ 88,205 $ 79,248
Intersegment 481 604 - 107
------------ ------------ ------------ ------------
Total Branded 233,349 225,338 88,205 79,355
Wholesale 366,317 293,958 131,842 100,725
------------ ------------ ------------ ------------
Net sales $ 599,666 $ 519,296 $ 220,047 $ 180,080
Operating income $ 40,157 $ 41,027 $ 17,872 $ 18,431
Long-lived assets $ 137,562 $ 139,655 $ 137,562 $ 139,655
Total assets $ 668,932 $ 644,396 $ 668,932 $ 644,396
Capital expenditures $ 6,473 $ 9,639 $ 2,434 $ 3,538
Depreciation and amortization $ 14,390 $ 15,400 $ 4,971 $ 5,363
Franciscan:
- -----------
Net sales:
External customers $ 100,742 $ 70,923 $ 43,410 $ 27,779
Intersegment 516 177 262 39
------------ ------------ ------------ ------------
Net sales $ 101,258 $ 71,100 $ 43,672 $ 27,818
Operating income $ 28,315 $ 18,659 $ 13,169 $ 9,001
Long-lived assets $ 150,055 $ 125,280 $ 150,055 $ 125,280
Total assets $ 615,248 $ 394,197 $ 615,248 $ 394,197
Capital expenditures $ 16,169 $ 21,407 $ 4,871 $ 13,074
Depreciation and amortization $ 9,125 $ 7,328 $ 2,889 $ 2,798
15
For the Nine Months For the Three Months
Ended November 30, Ended November 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(in thousands)
Corporate Operations and Other:
- -------------------------------
Net sales $ - $ - $ - $ -
Operating loss $ (19,665) $ (16,579) $ (6,417) $ (4,845)
Long-lived assets $ 7,206 $ 3,738 $ 7,206 $ 3,738
Total assets $ 30,191 $ 24,452 $ 30,191 $ 24,452
Capital expenditures $ 3,422 $ 117 $ 2,777 $ 45
Depreciation and amortization $ 3,443 $ 2,579 $ 1,146 $ 866
Intersegment eliminations:
- --------------------------
Net sales $ (18,942) $ (17,254) $ (5,707) $ (5,131)
Consolidated:
- -------------
Net sales $ 2,146,959 $ 1,852,647 $ 764,074 $ 629,577
Operating income $ 267,747 $ 213,406 $ 108,823 $ 85,238
Long-lived assets $ 561,667 $ 536,300 $ 561,667 $ 536,300
Total assets $ 3,127,491 $ 2,465,790 $ 3,127,491 $ 2,465,790
Capital expenditures $ 47,158 $ 47,806 $ 18,363 $ 22,557
Depreciation and amortization $ 63,991 $ 55,111 $ 20,730 $ 19,046
14) ACCOUNTING PRONOUNCEMENTS:
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-14 ("EITF No. 00-14"), "Accounting for Certain Sales Incentives," which was
subsequently amended in April 2001. EITF No. 00-14 addresses the recognition,
measurement and income statement classification of certain sales incentives.
EITF No. 00-14 requires that sales incentives, including coupons, rebate offers,
and free product offers, given concurrently with a single exchange transaction
be recognized when incurred and reported as a reduction of revenue. In addition,
in April 2001, the EITF issued EITF Issue No. 00-25 ("EITF No. 00-25"), "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF No. 00-25 addresses the income statement classification
of certain consideration, other than directly addressed in EITF No. 00-14, from
a vendor to an entity that purchases the vendor's products for resale. EITF No.
00-25 requires that certain consideration from a vendor to a reseller of the
vendor's products be reported as a reduction of revenue. The Company currently
reports costs that fall under both EITF No. 00-14 and EITF No. 00-25 as selling,
general and administrative expenses. The Company is required to adopt EITF No.
00-14 and EITF No. 00-25 in its financial statements beginning March 1, 2002.
Upon adoption of EITF No. 00-14 and EITF No. 00-25, financial statements for
prior periods presented for comparative purposes are to be reclassified to
comply with the requirements of EITF No. 00-14 and EITF No. 00-25. The Company
believes the impact of EITF No. 00-14 and EITF No. 00-25 on its financial
statements will result in a material reclassification that will decrease
previously reported net sales and decrease previously reported selling, general
and administrative expenses, but will have no effect on operating income or net
income. The Company has not yet determined the amount of the reclassification.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 addresses financial accounting and reporting for
business combinations requiring all business combinations to be accounted for
using one method, the purchase method. In addition, SFAS No. 141 supersedes
Accounting Principles Board Opinion No. 16, "Business Combinations." SFAS No.
141 is effective immediately for all business combinations initiated after June
30, 2001, as well as for all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001, or later. The Company
is required to adopt SFAS No. 141 for all business combinations for which the
16
acquisition date was before July 1, 2001, for fiscal years beginning March 1,
2002. The adoption of the applicable provisions of SFAS No. 141 have not had a
material impact on the Company's financial statements. The Company believes that
the adoption of the remaining provisions of SFAS No. 141 will not have a
material impact on its financial statements.
In July 2001, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets." SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
Accounting Principles Board Opinion No. 17, "Intangible Assets." Under SFAS No.
142, goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed at least annually for impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives. The Company is required to apply the provisions of SFAS No.
142 for all goodwill and intangible assets acquired prior to July 1, 2001, for
fiscal years beginning March 1, 2002. For goodwill and intangible assets
acquired after June 30, 2001, these assets are subject immediately to the
nonamortization and amortization provisions of SFAS No. 142. The Company's
preliminary assessment of the financial impact of SFAS No. 142 on its financial
statements is that approximately $24 million of amortization of existing
goodwill and other intangible assets for the fiscal year ending February 28,
2002, will not be incurred in subsequent fiscal years.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company is required to adopt
SFAS No. 143 for fiscal years beginning March 1, 2003. The Company is currently
assessing the financial impact of SFAS No. 143 on its financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business (as previously defined in that Opinion). The Company is
required to adopt SFAS No. 144 for fiscal years beginning March 1, 2002. The
Company is currently assessing the financial impact of SFAS No. 144 on its
financial statements.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
INTRODUCTION
- ------------
The Company is a leader in the production and marketing of beverage alcohol
brands in North America and the United Kingdom, and a leading independent drinks
wholesaler in the United Kingdom. As the second largest supplier of wine, the
second largest importer of beer and the fourth largest supplier of distilled
spirits, the Company is the largest single-source supplier of these products in
the United States. In the United Kingdom, the Company is a leading marketer of
wine and the second largest producer and marketer of cider.
The Company reports its operating results in five segments: Canandaigua
Wine (branded popular and premium wine and brandy, and other, primarily grape
juice concentrate and bulk wine); Barton (primarily beer and distilled spirits);
Matthew Clark (branded wine, cider and bottled water, and wholesale wine, cider,
distilled spirits, beer and soft drinks); Franciscan (primarily branded
super-premium and ultra-premium wine); and Corporate Operations and Other
(primarily corporate related items).
On April 10, 2001, the Board of Directors of the Company approved a
two-for-one stock split of both the Company's Class A Common Stock and Class B
Common Stock, which was distributed in the form of a stock dividend on May 14,
2001, to stockholders of record on April 30, 2001. Pursuant to the terms of the
stock dividend, each holder of Class A Common Stock received one additional
share of Class A stock for each share of Class A stock held, and each holder of
Class B Common Stock received one additional share of Class B stock for each
share of Class B stock held. All share and per share amounts in this Quarterly
Report on Form 10-Q reflect the common stock split.
The following discussion and analysis summarizes the significant factors
affecting (i) consolidated results of operations of the Company for the three
months ended November 30, 2001 ("Third Quarter 2002"), compared to the three
months ended November 30, 2000 ("Third Quarter 2001"), and for the nine months
ended November 30, 2001 ("Nine Months 2002"), compared to the nine months ended
November 30, 2000 ("Nine Months 2001"), and (ii) financial liquidity and capital
resources for Nine Months 2002. This discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included herein and in the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 2001 ("Fiscal 2001").
ACQUISITIONS IN FISCAL 2002 AND FISCAL 2001
On July 2, 2001, the Company acquired all of the outstanding capital stock
of Ravenswood Winery, Inc. ("Ravenswood"), a leading premium wine producer based
in Sonoma, California. Ravenswood produces, markets and sells super-premium and
ultra-premium California wine primarily under the Ravenswood brand name. The
vast majority of the wine Ravenswood produces and sells is red wine, including
the number one super-premium Zinfandel in the United States. The results of
operations of Ravenswood are reported in the Franciscan segment and have been
included in the consolidated results of operations of the Company since the date
of acquisition.
On March 26, 2001, in an asset acquisition, the Company acquired certain
wine brands, wineries, working capital (primarily inventories), and other
related assets from Corus Brands, Inc. (the "Corus Assets"). In this
acquisition, the Company acquired several well-known premium wine brands
primarily sold in the northwestern United States, including Covey Run, Columbia,
Ste. Chapelle and Alice White. In connection with the transaction, the Company
also entered into long-term grape supply agreements with affiliates of Corus
Brands, Inc. covering more than 1,000 acres of Washington and Idaho vineyards.
18
The results of operations of the Corus Assets are reported in the Canandaigua
Wine segment and have been included in the consolidated results of operations of
the Company since the date of acquisition.
On March 5, 2001, in an asset acquisition, the Company acquired several
well-known premium wine brands, including Vendange, Nathanson Creek, Heritage,
and Talus, working capital (primarily inventories), two wineries in California,
and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River
Vintners Group (the "Turner Road Vintners Assets"). The results of operations of
the Turner Road Vintners Assets are reported in the Canandaigua Wine segment and
have been included in the consolidated results of operations of the Company
since the date of acquisition. The acquisition of the Turner Road Vintners
Assets is significant and the Company expects it to have a material impact on
the Company's future results of operations.
On October 27, 2000, the Company purchased all of the issued Ordinary
Shares and Preference Shares of Forth Wines Limited ("Forth Wines"). The results
of operations of Forth Wines are reported in the Matthew Clark segment and have
been included in the consolidated results of operations of the Company since the
date of acquisition.
JOINT VENTURE
On July 31, 2001, the Company and BRL Hardy Limited completed the formation
of Pacific Wine Partners LLC ("PWP"), a joint venture owned equally by the
Company and BRL Hardy Limited, the second largest wine company in Australia. PWP
produces, markets and sells a global portfolio of premium wine in the United
States, including a range of Australian imports, the fastest growing wine
segment in the United States. PWP has exclusive distribution rights in the
United States and the Caribbean to seven brands - Banrock Station, Hardys,
Leasingham, Barossa Valley Estate and Chateau Reynella from Australia; Nobilo
from New Zealand; and La Baume from France. The joint venture also owns
Farallon, a premium California coastal wine. In addition, PWP owns the Riverland
Vineyards winery and controls 1,400 acres of vineyards, all located in Monterey
County, California.
On October 16, 2001, the Company announced that PWP completed the purchase
of certain assets of Blackstone Winery, including the Blackstone brand and the
Codera wine business in Sonoma County.
The investment in PWP is accounted for using the equity method;
accordingly, the results of operations of PWP since July 31, 2001, have been
included in the equity in earnings of joint venture line in the Consolidated
Statements of Income of the Company.
19
RESULTS OF OPERATIONS
- ---------------------
THIRD QUARTER 2002 COMPARED TO THIRD QUARTER 2001
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Third Quarter 2002 and Third Quarter 2001.
Third Quarter 2002 Compared to Third Quarter 2001
-------------------------------------------------
Net Sales
-------------------------------------------------
%Increase/
2002 2001 (Decrease)
------------ ------------ ----------
Canandaigua Wine:
Branded:
External customers $ 220,670 $ 160,221 37.7 %
Intersegment 2,888 1,891 52.7 %
------------ ------------
Total Branded 223,558 162,112 37.9 %
------------ ------------
Other:
External customers 18,857 19,215 (1.9)%
Intersegment 2,557 3,095 (17.4)%
------------ ------------
Total Other 21,414 22,310 (4.0)%
------------ ------------
Canandaigua Wine net sales $ 244,972 $ 184,422 32.8 %
------------ ------------
Barton:
Beer $ 181,264 $ 163,292 11.0 %
Spirits 79,826 79,096 0.9 %
------------ ------------
Barton net sales $ 261,090 $ 242,388 7.7 %
------------ ------------
Matthew Clark:
Branded:
External customers $ 88,205 $ 79,248 11.3 %
Intersegment - 107 (100.0)%
------------ ------------
Total Branded 88,205 79,355 11.2 %
Wholesale 131,842 100,725 30.9 %
------------ ------------
Matthew Clark net sales $ 220,047 $ 180,080 22.2 %
------------ ------------
Franciscan:
External customers $ 43,410 $ 27,779 56.3 %
Intersegment 262 39 571.8 %
------------ ------------
Franciscan net sales $ 43,672 $ 27,818 57.0 %
------------ ------------
Corporate Operations and Other $ - $ - N/A
------------ ------------
Intersegment eliminations $ (5,707) $ (5,131) 11.2 %
------------ ------------
Consolidated Net Sales $ 764,074 $ 629,577 21.4 %
============ ============
Net sales for Third Quarter 2002 increased to $764.1 million from $629.6
million for Third Quarter 2001, an increase of $134.5 million, or 21.4%.
Canandaigua Wine
----------------
Net sales for Canandaigua Wine for Third Quarter 2002 increased to $245.0
million from $184.4 million for Third Quarter 2001, an increase of $60.6
million, or 32.8%. This increase resulted primarily from $54.0 million of sales
of the newly acquired brands from the Turner Road Vintners Assets and Corus
Assets acquisitions ("the March Acquisitions"), both completed in March 2001.
20
Barton
------
Net sales for Barton for Third Quarter 2002 increased to $261.1 million
from $242.4 million for Third Quarter 2001, an increase of $18.7 million, or
7.7%. This increase resulted primarily from an 11.0% increase in imported beer
sales, led by volume growth in the Mexican beer portfolio. Spirits sales
increased slightly primarily from an increase in bulk whiskey sales, partially
offset by slightly lower branded spirits sales.
Matthew Clark
-------------
Net sales for Matthew Clark for Third Quarter 2002 increased to $220.0
million from $180.1 million for Third Quarter 2001, an increase of $40.0
million, or 22.2%. There was no significant foreign currency impact on net sales
for Third Quarter 2002. This increase resulted primarily from a 30.9% increase
in wholesale sales driven by sales to national accounts. Additionally, branded
sales increased 11.2% with an increase in wine sales, particularly Stowells of
Chelsea and the California wine portfolio, being partially offset by a slight
decrease in cider sales.
Franciscan
----------
Net sales for Franciscan for Third Quarter 2002 increased to $43.7 million
from $27.8 million for Third Quarter 2001, an increase of $15.9 million, or
57.0%. This increase resulted primarily from $15.5 million of sales of the newly
acquired brands from the Ravenswood acquisition, completed in July 2001.
GROSS PROFIT
The Company's gross profit increased to $258.4 million for Third Quarter
2002 from $208.1 million for Third Quarter 2001, an increase of $50.4 million,
or 24.2%. The dollar increase in gross profit resulted primarily from sales of
the newly acquired brands from the March Acquisitions and the Ravenswood
acquisition, volume growth in the Barton Mexican beer portfolio, and volume
growth in the Matthew Clark branded wine business and wholesale business. As a
percent of net sales, gross profit improved to 33.8% for Third Quarter 2002
versus 33.0% for Third Quarter 2001. The increase in gross profit margin
resulted primarily from sales of higher-margin wine brands acquired in the March
Acquisitions and the Ravenswood acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $149.6 million
for Third Quarter 2002 from $122.8 million for Third Quarter 2001, an increase
of $26.8 million, or 21.8%. The dollar increase in selling, general and
administrative expenses resulted primarily from advertising and promotion costs
associated with the brands acquired in the March Acquisitions and the Ravenswood
acquisition, higher promotional costs associated with the Matthew Clark cider
business, as well as increases related to volume growth in the Matthew Clark
branded wine business and the Barton Mexican beer portfolio. Selling, general
and administrative expenses as a percent of net sales were virtually unchanged
at 19.6% for Third Quarter 2002 as compared to 19.5% for Third Quarter 2001.
21
OPERATING INCOME
The following table sets forth the operating income/(loss) (in thousands of
dollars) by operating segment of the Company for Third Quarter 2002 and Third
Quarter 2001.
Third Quarter 2002 Compared to Third Quarter 2001
-------------------------------------------------
Operating Income/(Loss)
-------------------------------------------------
%Increase/
2002 2001 (Decrease)
---------- ---------- ----------
Canandaigua Wine $ 36,377 $ 16,281 123.4 %
Barton 47,822 46,370 3.1 %
Matthew Clark 17,872 18,431 (3.0)%
Franciscan 13,169 9,001 46.3 %
Corporate Operations and Other (6,417) (4,845) 32.4 %
---------- ----------
Consolidated Operating Income $ 108,823 $ 85,238 27.7 %
========== ==========
As a result of the above factors, consolidated operating income increased
to $108.8 million for Third Quarter 2002 from $85.2 million for Third Quarter
2001, an increase of $23.6 million, or 27.7%.
INTEREST EXPENSE, NET
Net interest expense increased to $27.2 million for Third Quarter 2002 from
$27.0 million for Third Quarter 2001, an increase of $0.3 million, or 1.0%. The
increase resulted primarily from an increase in average borrowings primarily due
to the financing of the March Acquisitions and the Ravenswood acquisition, which
was virtually offset by a decrease in the average interest rate.
NET INCOME
As a result of the above factors, net income increased to $49.6 million for
Third Quarter 2002 from $35.0 million for Third Quarter 2001, an increase of
$14.7 million, or 42.0%.
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") for Third Quarter 2002
were $130.7 million, an increase of $26.4 million over EBITDA of $104.3 million
for Third Quarter 2001. EBITDA should not be construed as an alternative to
operating income or net cash flow from operating activities and should not be
construed as an indication of operating performance or as a measure of
liquidity.
22
NINE MONTHS 2002 COMPARED TO NINE MONTHS 2001
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Nine Months 2002 and Nine Months 2001.
Nine Months 2002 Compared to Nine Months 2001
---------------------------------------------
Net Sales
---------------------------------------------
%Increase/
2002 2001 (Decrease)
------------ ------------ ----------
Canandaigua Wine:
Branded:
External customers $ 583,700 $ 450,927 29.4 %
Intersegment 7,532 5,023 50.0 %
------------ ------------
Total Branded 591,232 455,950 29.7 %
------------ ------------
Other:
External customers 46,240 49,317 (6.2)%
Intersegment 10,413 11,450 (9.1)%
------------ ------------
Total Other 56,653 60,767 (6.8)%
------------ ------------
Canandaigua Wine net sales $ 647,885 $ 516,717 25.4 %
------------ ------------
Barton:
Beer $ 593,435 $ 538,585 10.2 %
Spirits 223,657 224,203 (0.2)%
------------ ------------
Barton net sales $ 817,092 $ 762,788 7.1 %
------------ ------------
Matthew Clark:
Branded:
External customers $ 232,868 $ 224,734 3.6 %
Intersegment 481 604 (20.4)%
------------ ------------
Total Branded 233,349 225,338 3.6 %
Wholesale 366,317 293,958 24.6 %
------------ ------------
Matthew Clark net sales $ 599,666 $ 519,296 15.5 %
------------ ------------
Franciscan:
External customers $ 100,742 $ 70,923 42.0 %
Intersegment 516 177 191.5 %
------------ ------------
Franciscan net sales $ 101,258 $ 71,100 42.4 %
------------ ------------
Corporate Operations and Other $ - $ - N/A
------------ ------------
Intersegment eliminations $ (18,942) $ (17,254) 9.8 %
------------ ------------
Consolidated Net Sales $ 2,146,959 $ 1,852,647 15.9 %
============ ============
Net sales for Nine Months 2002 increased to $2,147.0 million from $1,852.6
million for Nine Months 2001, an increase of $294.3 million, or 15.9%.
Canandaigua Wine
----------------
Net sales for Canandaigua Wine for Nine Months 2002 increased to $647.9
million from $516.7 million for Nine Months 2001, an increase of $131.2 million,
or 25.4%. This increase resulted primarily from $137.6 million of sales of the
newly acquired brands from the March Acquisitions. This increase was partially
offset by declines in Canandaigua Wine's grape juice concentrate business and
other wine brands.
23
Barton
------
Net sales for Barton for Nine Months 2002 increased to $817.1 million from
$762.8 million for Nine Months 2001, an increase of $54.3 million, or 7.1%. This
increase resulted primarily from a 10.2% increase in imported beer sales, led by
volume growth in the Mexican beer portfolio. This increase was partially offset
by a slight decrease in spirits sales as a result of lower net selling prices
from the implementation of a net pricing strategy in the third quarter of Fiscal
2001, which also resulted in lower promotion costs.
Matthew Clark
-------------
Net sales for Matthew Clark for Nine Months 2002 increased to $599.7
million from $519.3 million for Nine Months 2001, an increase of $80.4 million,
or 15.5%. Excluding an adverse foreign currency impact of $24.8 million, net
sales increased $105.2 million, or 20.3%. This local currency basis increase
resulted primarily from a 29.9% increase in wholesale sales, with the majority
of this growth coming from organic sales. Additionally, branded sales increased
7.8% with an increase in wine sales being partially offset by a decrease in
cider sales.
Franciscan
----------
Net sales for Franciscan for Nine Months 2002 increased to $101.3 million
from $71.1 million for Nine Months 2001, an increase of $30.2 million, or 42.4%.
This increase resulted primarily from $20.9 million of sales of the newly
acquired brands from the Ravenswood acquisition and organic sales growth
primarily due to volume increases in the Estancia, Veramonte, and Franciscan
brands.
GROSS PROFIT
The Company's gross profit increased to $698.0 million for Nine Months 2002
from $592.6 million for Nine Months 2001, an increase of $105.5 million, or
17.8%. The dollar increase in gross profit resulted primarily from sales of the
newly acquired brands from the March Acquisitions and the Ravenswood
acquisition, volume growth in the Barton Mexican beer portfolio, volume growth
in the Matthew Clark wholesale business and branded wine business, and volume
growth in the Franciscan fine wine portfolio. These increases were partially
offset by a decrease in Barton's spirits sales, an adverse foreign currency
impact, a decrease in Canandaigua Wine's organic wine sales and a volume
decrease in Matthew Clark's cider sales. As a percent of net sales, gross profit
improved slightly to 32.5% for Nine Months 2002 versus 32.0% for Nine Months
2001. The increase in gross profit margin resulted primarily from sales of
higher-margin wine brands acquired in the March Acquisitions and the Ravenswood
acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $430.3 million
for Nine Months 2002 from $379.2 million for Nine Months 2001, an increase of
$51.1 million, or 13.5%. The dollar increase in selling, general and
administrative expenses resulted primarily from advertising and promotion costs
associated with the brands acquired in the March Acquisitions and the Ravenswood
acquisition. Selling, general and administrative expenses as a percent of net
sales decreased to 20.0% for Nine Months 2002 as compared to 20.5% for Nine
Months 2001 as a decrease in Barton spirits advertising and promotion costs was
greater than the decrease in Barton spirits net sales and the percent increase
in Matthew Clark wholesale sales was greater than the percent increase in
selling, general and administrative expenses.
24
OPERATING INCOME
The following table sets forth the operating income/(loss) (in thousands of
dollars) by operating segment of the Company for Nine Months 2002 and Nine
Months 2001.
Nine Months 2002 Compared to Nine Months 2001
---------------------------------------------
Operating Income/(Loss)
---------------------------------------------
%Increase/
2002 2001 (Decrease)
------------ ------------ ----------
Canandaigua Wine $ 75,706 $ 34,481 119.6 %
Barton 143,234 135,818 5.5 %
Matthew Clark 40,157 41,027 (2.1)%
Franciscan 28,315 18,659 51.7 %
Corporate Operations and Other (19,665) (16,579) 18.6 %
------------ ------------
Consolidated Operating Income $ 267,747 $ 213,406 25.5 %
============ ============
As a result of the above factors, consolidated operating income increased
to $267.7 million for Nine Months 2002 from $213.4 million for Nine Months 2001,
an increase of $54.3 million, or 25.5%.
INTEREST EXPENSE, NET
Net interest expense increased to $86.4 million for Nine Months 2002 from
$81.8 million for Nine Months 2001, an increase of $4.6 million, or 5.6%. The
increase resulted primarily from an increase in average borrowings primarily due
to the financing of the March Acquisitions and the Ravenswood acquisition,
partially offset by a slight decrease in the average interest rate.
NET INCOME
As a result of the above factors, net income increased to $109.4 million
for Nine Months 2002 from $79.0 million for Nine Months 2001, an increase of
$30.5 million, or 38.6%.
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") for Nine Months 2002
were $332.8 million, an increase of $64.2 million over EBITDA of $268.5 million
for Nine Months 2001. EBITDA should not be construed as an alternative to
operating income or net cash flow from operating activities and should not be
construed as an indication of operating performance or as a measure of
liquidity.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------
GENERAL
The Company's principal use of cash in its operating activities is for
purchasing and carrying inventories. The Company's primary source of liquidity
has historically been cash flow from operations, except during the annual fall
grape harvests when the Company has relied on short-term borrowings. The annual
grape crush normally begins in August and runs through October. The Company
generally begins purchasing grapes in August with payments for such grapes
beginning to come due in September. The Company's short-term borrowings to
support such purchases generally reach their highest levels in November or
December. Historically, the Company has used cash flow from operating activities
to repay its short-term borrowings. The Company will continue to use its
short-term borrowings to support its working capital requirements. The Company
believes that cash provided by operating activities and its financing
activities, primarily short-term borrowings, will provide adequate resources to
satisfy its
25
working capital, liquidity and anticipated capital expenditure requirements for
both its short-term and long-term capital needs.
NINE MONTHS 2002 CASH FLOWS
OPERATING ACTIVITIES
Net cash provided by operating activities for Nine Months 2002 was $123.7
million, which resulted from $170.7 million in net income adjusted for noncash
items, less $47.0 million representing the net change in the Company's operating
assets and liabilities. The net change in operating assets and liabilities
resulted primarily from a seasonal increase in accounts receivable and
inventories, partially offset by increases in accounts payable, accrued grape
purchases, accrued income taxes and accrued advertising and promotion expenses.
INVESTING ACTIVITIES AND FINANCING ACTIVITIES
Net cash used in investing activities for Nine Months 2002 was $561.3
million, which resulted from net cash paid of $472.3 million for the March
Acquisitions and the Ravenswood acquisition, $77.3 million of equity
contributions to PWP and $47.2 million of capital expenditures, partially offset
by $35.5 million of proceeds from the sale of assets.
Net cash provided by financing activities for Nine Months 2002 was $302.3
million, which resulted primarily from proceeds of $156.2 million from net
revolving loan borrowings under the senior credit facility, net proceeds of
$151.5 million from the equity offerings, and proceeds of $35.2 million from
exercise of employee stock options. These amounts were partially offset by
principal payments of long-term debt of $43.1 million.
DEBT
Total debt outstanding as of November 30, 2001, amounted to $1,498.6
million, an increase of $132.8 million from February 28, 2001. The ratio of
total debt to total capitalization decreased to 62.3% as of November 30, 2001,
from 68.9% as of February 28, 2001.
SENIOR CREDIT FACILITY
As of November 30, 2001, under its senior credit facility, the Company had
outstanding term loans of $303.8 million bearing a weighted average interest
rate of 4.0%, $155.0 million of revolving loans bearing a weighted average
interest rate of 3.4%, undrawn revolving letters of credit of $19.1 million, and
$125.9 million in revolving loans available to be drawn.
SENIOR NOTES
As of November 30, 2001, the Company had outstanding $200.0 million
aggregate principal amount of 8 5/8% Senior Notes due August 2006 (the "Senior
Notes"). The Senior Notes are currently redeemable, in whole or in part, at the
option of the Company.
As of November 30, 2001, the Company had outstanding (pound)1.0 million
($1.4 million) aggregate principal amount of 8 1/2% Series B Senior Notes due
November 2009 (the "Sterling Series B Senior Notes"). In addition, the Company
had outstanding (pound)154.0 million ($218.8 million, net of $0.5 million
unamortized discount) aggregate principal amount of 8 1/2% Series C Senior Notes
due November 2009
26
(the "Sterling Series C Senior Notes") as of November 30, 2001. The Sterling
Series B Senior Notes and Sterling Series C Senior Notes are currently
redeemable, in whole or in part, at the option of the Company.
In July 2001, the Company exchanged $200.0 million aggregate principal
amount of 8% Series B Senior Notes due February 2008 (the "February 2001 Series
B Senior Notes") for all of the February 2001 Senior Notes. The terms of the
February 2001 Series B Senior Notes are identical in all material respects to
the February 2001 Senior Notes. The February 2001 Series B Senior Notes are
currently redeemable, in whole or in part, at the option of the Company. As of
November 30, 2001, the Company had outstanding $200.0 million aggregate
principal amount of February 2001 Series B Senior Notes.
SENIOR SUBORDINATED NOTES
As of November 30, 2001, the Company had outstanding $195.0 million ($193.8
million, net of $1.2 million unamortized discount) aggregate principal amount of
8 3/4% Senior Subordinated Notes due December 2003 (the "Original Notes"). The
Original Notes are currently redeemable, in whole or in part, at the option of
the Company.
Also, as of November 30, 2001, the Company had outstanding $200.0 million
aggregate principal amount of 8 1/2% Senior Subordinated Notes due March 2009
(the "Senior Subordinated Notes"). The Senior Subordinated Notes are redeemable
at the option of the Company, in whole or in part, at any time on or after March
1, 2004. The Company may also redeem up to $70.0 million of the Senior
Subordinated Notes using the proceeds of certain equity offerings completed
before March 1, 2002.
EQUITY OFFERINGS
During March 2001, the Company completed a public offering of 4,370,000
shares of its Class A Common Stock resulting in net proceeds to the Company,
after deducting underwriting discounts and expenses, of $139.4 million. The net
proceeds were used to repay revolving loan borrowings under the senior credit
facility of which a portion was incurred to partially finance the acquisition of
the Turner Road Vintners Assets.
During October 2001, the Company sold 322,500 shares of its Class A Common
Stock in connection with a public offering of Class A Common Stock by
stockholders of the Company. The net proceeds to the Company, after deducting
underwriting discounts, of $12.1 million were used to repay borrowings under the
senior credit facility.
ACCOUNTING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-14 ("EITF No. 00-14"), "Accounting for Certain Sales Incentives," which was
subsequently amended in April 2001. EITF No. 00-14 addresses the recognition,
measurement and income statement classification of certain sales incentives.
EITF No. 00-14 requires that sales incentives, including coupons, rebate offers,
and free product offers, given concurrently with a single exchange transaction
be recognized when incurred and reported as a reduction of revenue. In addition,
in April 2001, the EITF issued EITF Issue No. 00-25 ("EITF No. 00-25"), "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF No. 00-25 addresses the income statement classification
of certain consideration, other than directly addressed in EITF No. 00-14, from
a vendor to an entity that purchases the vendor's products for resale. EITF No.
00-25 requires that certain consideration from a vendor to a reseller of the
vendor's products be reported as a reduction of revenue. The Company currently
reports costs that fall under both EITF No. 00-14 and EITF No. 00-25 as selling,
general and administrative
27
expenses. The Company is required to adopt EITF No. 00-14 and EITF No. 00-25 in
its financial statements beginning March 1, 2002. Upon adoption of EITF No.
00-14 and EITF No. 00-25, financial statements for prior periods presented for
comparative purposes are to be reclassified to comply with the requirements of
EITF No. 00-14 and EITF No. 00-25. The Company believes the impact of EITF No.
00-14 and EITF No. 00-25 on its financial statements will result in a material
reclassification that will decrease previously reported net sales and decrease
previously reported selling, general and administrative expenses, but will have
no effect on operating income or net income. The Company has not yet determined
the amount of the reclassification.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 addresses financial accounting and reporting for
business combinations requiring all business combinations to be accounted for
using one method, the purchase method. In addition, SFAS No. 141 supersedes
Accounting Principles Board Opinion No. 16, "Business Combinations." SFAS No.
141 is effective immediately for all business combinations initiated after June
30, 2001, as well as for all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001, or later. The Company
is required to adopt SFAS No. 141 for all business combinations for which the
acquisition date was before July 1, 2001, for fiscal years beginning March 1,
2002. The adoption of the applicable provisions of SFAS No. 141 have not had a
material impact on the Company's financial statements. The Company believes that
the adoption of the remaining provisions of SFAS No. 141 will not have a
material impact on its financial statements.
In July 2001, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets." SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
Accounting Principles Board Opinion No. 17, "Intangible Assets." Under SFAS No.
142, goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed at least annually for impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives. The Company is required to apply the provisions of SFAS No.
142 for all goodwill and intangible assets acquired prior to July 1, 2001, for
fiscal years beginning March 1, 2002. For goodwill and intangible assets
acquired after June 30, 2001, these assets are subject immediately to the
nonamortization and amortization provisions of SFAS No. 142. The Company's
preliminary assessment of the financial impact of SFAS No. 142 on its financial
statements is that approximately $24 million of amortization of existing
goodwill and other intangible assets for the fiscal year ending February 28,
2002, will not be incurred in subsequent fiscal years.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company is required to adopt
SFAS No. 143 for fiscal years beginning March 1, 2003. The Company is currently
assessing the financial impact of SFAS No. 143 on its financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for the disposal of a
28
segment of a business (as previously defined in that Opinion). The Company is
required to adopt SFAS No. 144 for fiscal years beginning March 1, 2002. The
Company is currently assessing the financial impact of SFAS No. 144 on its
financial statements.
EURO CONVERSION ISSUES
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union (the "Participating Countries") established fixed conversion
rates between their existing sovereign currencies and the euro. Effective
January 1, 2002, the euro became the sole currency of the Participating
Countries. The Company does not believe that the effects of the conversion will
have a material adverse effect on the Company's business and operations.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control, that could cause actual results to differ materially from
those set forth in, or implied by, such forward-looking statements. All
statements other than statements of historical facts included in this Quarterly
Report on Form 10-Q, including statements regarding the Company's future
financial position and prospects, are forward-looking statements. All
forward-looking statements speak only as of the date of this Quarterly Report on
Form 10-Q. The Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. For risk factors associated with the Company and its
business, which factors could cause actual results to differ materially from
those set forth in, or implied by, the Company's forward-looking statements,
reference should be made to the Company's filings with the Securities and
Exchange Commission, including its Annual Report on Form 10-K for the fiscal
year ended February 28, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
Information about market risks for the nine months ended November 30, 2001,
does not differ materially from that discussed under Item 7A in the Company's
Annual Report on Form 10-K for the fiscal year ended February 28, 2001.
29
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) See Index to Exhibits located on Page 32 of this Report.
(b) The following Reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended November 30, 2001:
(i) Form 8-K dated September 4, 2001. This Form 8-K reported
information under Item 5.
(ii) Form 8-K dated September 25, 2001. This Form 8-K reported
information under Item 7.
(iii) Form 8-K dated October 2, 2001. This Form 8-K reported
information under Item 5 and included (i) the Company's
Condensed Consolidated Balance Sheets as of August 31, 2001
and February 28, 2001; (ii) the Company's Condensed
Consolidated Statements of Income for the three months ended
August 31, 2001 and August 31, 2000; and (iii) the Company's
Condensed Consolidated Statements of Income for the six months
ended August 31, 2001 and August 31, 2000.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSTELLATION BRANDS, INC.
Dated: January 14, 2002 By: /s/ Thomas F. Howe
--------------------------------------
Thomas F. Howe, Senior Vice President,
Controller
Dated: January 14, 2002 By: /s/ Thomas S. Summer
--------------------------------------
Thomas S. Summer, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
31
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
2.1 Asset Purchase Agreement dated as of February 21, 1999 by and among
Diageo Inc., UDV Canada Inc., United Distillers Canada Inc. and the
Company (filed as Exhibit 2 to the Company's Current Report on Form 8-K
dated April 9, 1999 and incorporated herein by reference).
2.2 Stock Purchase Agreement, dated April 21, 1999, between Franciscan
Vineyards, Inc., Agustin Huneeus, Agustin Francisco Huneeus, Jean-Michel
Valette, Heidrun Eckes-Chantre Und Kinder Beteiligungsverwaltung II, GbR,
Peter Eugen Eckes Und Kinder Beteiligungsverwaltung II, GbR, Harald
Eckes-Chantre, Christina Eckes-Chantre, Petra Eckes-Chantre and the
Company (filed as Exhibit 2.1 on the Company's Current Report on Form 8-K
dated June 4, 1999 and incorporated herein by reference).
2.3 Stock Purchase Agreement by and between Canandaigua Wine Company, Inc. (a
wholly-owned subsidiary of the Company) and Moet Hennessy, Inc. dated
April 1, 1999 (filed as Exhibit 2.3 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended May 31, 1999 and incorporated
herein by reference).
2.4 Purchase Agreement dated as of January 30, 2001, by and among Sebastiani
Vineyards, Inc., Tuolomne River Vintners Group and Canandaigua Wine
Company, Inc. (a wholly-owned subsidiary of the Company) (filed as
Exhibit 2.5 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 2001 and incorporated herein by reference).
2.5 First Amendment to Purchase Agreement and Pro Forma Closing Balance
Sheet, dated as of March 5, 2001, by and among Sebastiani Vineyards,
Inc., Tuolomne River Vintners Group and Canandaigua Wine Company, Inc.
(including a list briefly identifying the contents of all omitted
schedules thereto) (filed herewith). The Company will furnish
supplementally to the Commission, upon request, a copy of any omitted
schedule.
2.6 Second Amendment to Purchase Agreement dated as of March 5, 2001, by and
among Sebastiani Vineyards, Inc., Tuolomne River Vintners Group and
Canandaigua Wine Company, Inc. (filed herewith).
2.7 Agreement and Plan of Merger by and among the Company, VVV Acquisition
Corp. and Ravenswood Winery, Inc. dated as of April 10, 2001 (filed as
Exhibit 2.5 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended May 31, 2001 and incorporated herein by reference).
(3) ARTICLES OF INCORPORATION AND BY-LAWS.
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended August 31, 2000 and incorporated herein by reference).
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31, 2000 and
incorporated herein by reference).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.1 Amendment No. 3 to the Credit Agreement, dated as of September 7, 2001
between the Company, certain principal subsidiaries, and The Chase
Manhattan Bank, as administrative agent
32
for certain banks (filed as Exhibit 4.7 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 31, 2001 and
incorporated herein by reference).
(10) MATERIAL CONTRACTS.
10.1 Amendment No. 3 to the Credit Agreement, dated as of September 7, 2001
between the Company, certain principal subsidiaries, and The Chase
Manhattan Bank, as administrative agent for certain banks (filed as
Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2001 and incorporated herein by reference).
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS.
11.1 Computation of per share earnings (filed herewith).
(15) LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION.
Not applicable.
(18) LETTER RE CHANGE IN ACCOUNTING PRINCIPLES.
Not applicable.
(19) REPORT FURNISHED TO SECURITY HOLDERS.
Not applicable.
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO A VOTE OF SECURITY
HOLDERS.
Not applicable.
(23) CONSENTS OF EXPERTS AND COUNSEL.
Not applicable.
(24) POWER OF ATTORNEY.
Not applicable.
(99) ADDITIONAL EXHIBITS.
None.
33